Social Media ETF Should Bounce

 | May 30, 2012 | 1:00 PM EDT
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For years, Facebook (FB) has been seemingly everywhere you look in your spare time, from pesky status updates to compulsive friending. Now, news of the company is plastered just about everywhere you look in the financial world as well.

The company's botched IPO and subsequent slide in stock price has been dominating the headlines for the past week and I have a feeling we haven't heard the last in this saga.

Facebook's aggressive IPO pricing was way out of whack with what the market would bear and the price of the stock deserved to be hammered accordingly. The current price of about $29 per share seems more reasonable than a lofty valuation in the $40 range given the current cash flow and growth potential. But just about every other stock with any involvement in social media has been hammered over the past week as well. They've essentially been found guilty by association and seen prices fall off a cliff. 

Investors have been acting as if they've suddenly learned of some damning new evidence that dooms this corner of the market. LinkedIn (LNKD) shares are down about 15% over the past week, despite no meaningful company-specific developments. Zynga (ZNGA) shares have lost about 25% of their value since calendars flipped to May, the result of a perceived Facebook dependency.

The Global X Social Media ETF (SOCL) has lost about 15% of its value over the past four weeks, making it one of the worst-performing stock ETFs during that period. And while Facebook is now a top holding in the fund, most of those losses were incurred prior to the addition of FB stock.

We seem to have jumped to the conclusion that Facebook's rough start as a public company is indicative of significant chinks in the armor of the social media industry. Viewed as such, the big decline in SOCL makes sense. But if you see Facebook's struggles as merely the result of an overly-aggressive IPO, you begin to see an opportunity created by the recent slide in associated stocks. 

SOCL has about 8% of its portfolio in Facebook stock, with the remainder spread out between domestic and international companies with meaningful social media operations. Most of these component companies have declined significantly over the past two weeks as a result of the Facebook fiasco, treatment that I'm not sure they deserved. The fact that a group of bankers talked Facebook into going for a $100 billion valuation instead of a more reasonable $80 billion doesn't change LinkedIn's profit margins or Zynga's user base. Most of the SOCL portfolio is exactly as it was pre-IPO, with one big difference: the share price.

Social media is going to experience its share of ups and downs in coming years, as any young industry does. Right now this sector is down from some indiscriminate selling and confusion over what exactly Facebook's IPO slip-up meant for the space. That translates into an opportunity in the short-term and SOCL should bounce back in the second half of this week to reclaim at least some of the ground lost over the past two weeks.

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